Affected market: Electricity generation and procurement of gas
The OFT's decision on reference under section 22 given on 6 January 2006. Full text published 20 February 2006.
Please note that square brackets indicate figures or text which have been deleted at the request of the parties for reasons of commercial confidentiality.
RWE Npower plc (RWE) (see note 1) is an energy group active in electricity generation and supply, and supply of gas, to customers in the UK. It is also engaged in the provision of engineering services to third parties.
Great Yarmouth Power Limited (GYPL), a subsidiary of BP plc prior to the acquisition, owns 100% of a 420 MW combined cycle gas turbine (CCGT) power station at Great Yarmouth in Norfolk (GYPS). GYPL's core activity is the generation of electricity from gas.
On 17 November 2005, RWE completed the purchase of the entire issued share capital of GYPL from BP for a total consideration of £155 million. GYPL has become a wholly-owned subsidiary of RWE.
The administrative deadline expires on 7 February 2006 and the statutory deadline expires on 16 March 2006.
As a result of this transaction RWE and GYPL have ceased to be distinct. The merger qualifies for investigation under the turnover test in section 23(1) of the Enterprise Act 2002, since the UK turnover of GYPL was some £108 million in 2004. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
FRAME OF REFERENCE
The parties overlap in electricity generation and procurement of natural gas.
Electricity can be generated using different fossil fuels and other power sources such as nuclear, hydro or wind. The output of power stations is essentially homogeneous. Electricity customers are generally indifferent (and unaware) of location of plant, type of power source or plant ownership, though most consider it prudent to source their electricity from a balanced portfolio of differently fuelled generators. Both parties have flexible generation capability, that is, they are able to respond relatively quickly to requirements for additional generation (see note 2). Since competition concerns do not arise on any reasonable frame of reference, it is not necessary to reach a definitive conclusion on the product frame of reference.
Procurement of natural gas
RWE procures gas for trading, electricity generation and supply. GYPL procures gas only to fuel its power station. The acquisition raises no competition concerns irrespective of how the procurement sector is defined.
As a result of the implementation of the British Electricity Trading and Transmission Arrangements (BETTA) (see note 3), Ofgem's view is that for the purpose of assessing this merger, the geographic scope of electricity generation (see note 4) and of the procurement of gas can be considered as Great Britain (GB). The OFT has seen no evidence that would suggest a different view is appropriate.
In GB, the parties will have capacity to supply 9,658 MW (see note 5) of power and will produce [30-40] TWh annually (see note 6). This represents a combined share of supply of electricity generation in GB of approximately [5-15] per cent (by capacity) and [5-15] per cent (by output) with increments of [less than 1 per cent][ ]. Two other electricity generators, Scottish and Southern Energy and E.ON UK, are of similar size to the merged entity, whilst British Energy remains the largest electricity generator. The merger results in a post-merger Herschman Herfindahl Index (HHI) figure of less than 1000 (delta 12) by capacity and output, signifying that the sector is not concentrated. This is confirmed by the National Grid Company's (NGC) 2005 Seven Year Statement which reports that there are nearly 140 generators located in GB, many of whom are small Independent Power Plants (IPPs).
Even considering a hypothetical narrower frame of reference limited to wholesale supply of flexible generation, the merger does not raise competition concerns. The combined share of supply in GB will be [10-20] per cent (in capacity) and [10-20] per cent (in output) with increments of 0.7 per cent and 1 per cent respectively. The HHI would be 1089 (delta 21) by capacity and 929 (delta 23) by output, signifying that even on this narrower basis, the segment is not concentrated.
Procurement of natural gas
In natural gas procurement in GB the combined share will be [5-15] per cent with a minimal increment of 0.5 per cent. This is a minor increment to RWE's share in procurement of gas and does not materially alter RWE's position in the procurement of gas in GB, and therefore it does not give rise to competition concerns in the procurement of natural gas sector.
RWE is a vertically integrated energy company with interests in electricity generation, distribution (see note 7) and supply as well as interests in gas shipping and supply. RWE's overall traded volumes are many times greater than those it purchases from and sells to its generation arm. No vertical concerns arise in this case. The additional GYPL generation volume will not change RWE's ability to trade power or its incentives to do so. Although several third parties expressed concerns about the incremental move toward greater vertical integration in the electricity generation and supply industry generally, none considered that the acquisition of GYPL will materially affect RWE's portfolio or its ability (and incentives) to trade power.
THIRD PARTY VIEWS
No third parties responded to the Invitation to Comment issued by the OFT. Third parties contacted by the OFT raised neither horizontal nor vertical merger-related competition concerns.
Ofgem received no comments from third parties. Furthermore, Ofgem had no competition concerns arising from this transaction.
The merger results in a minor increment to RWE's share of supply in generation of electricity and does not materially alter its position. These conclusions would apply even if a narrower frame of reference of supply of flexible generation in GB were considered. The same conclusions apply to gas procurement. Furthermore, third parties and Ofgem had no substantive competition concerns.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
1. RWE has stated that RWE Npower is a part of the RWE Group (RWE). It is responsible for RWE's UK energy business. RWE also includes RWE Trading GmbH which is engaged in commodity trading. For the purpose of this assessment RWE has been considered as a single entity.
2. The ability (or 'flexibility') of a plant to respond to increased prices by increasing output in the short term varies according to its input: nuclear power is virtually fixed, wind power is unpredictable while gas fired plant is the most flexible of all. For the purpose of this assessment, it can be considered that plants fuelled with coal, gas and oil are flexible.
3. BETTA is a scheme operating from 1 April 2005 to integrate trading arrangements in Scotland with the New Electricity Trading Arrangements (NETA) which has been in place since 1 April 2001 in England and Wales.
4. Although under certain circumstances, issues may arise at local level, no such concerns are raised by this case given GYPS' location, relatively small size, and its low generation capacity which would not give it sufficient market power in situations of transmission constraints.
5. Source: RWE.
6. Source: RWE.
7. RWE has pointed out that it is not active in electricity distribution in the UK.